Wednesday, August 26, 2009

The certified-forestry movement is running out of steam, a United Nations report suggests.

"The pace of expansion of global certified forest area has slowed dramatically in the last three years," says the international agency's recently released Forest Products Annual Market Review, 2008-2009. The proportion of "industrial roundwood" coming from forests certified by such environmental organizations as the Forest Stewardship Council (FSC) has actually decreased recently, to 25.9%, it says.

"Certified forest area increased by around 50 million hectares a year between 2001 and 2005 – mainly due to a rapid increase in certified forest area in North America – then the rate slowed by half to 25 million hectares a year in 2006 and 2007. More recently the rate has stagnated even further, not exceeding 4 million hectares between May 2008 and May 2009." Certified forestry has actually lost some ground in North America and Europe, the U.N. report adds.

One culprit is that the sustainable-forestry movement is running out of low-hanging fruit: "Now that many of the largest state- and industry-owned lands in the developed world are alreadycertified, the certification movement faces the significant challenge of expanding in more difficultareas" such as small forestry operations and developing countries.

Ignorance is another hurdle: "According to a recent survey, only 12% of US family forest owners have heard of forest certification."

From a financial standpoint, sellers of wood products often cannot justify the additional costs of sourcing from certified forests: "Generally, there is great reluctance among end-users to pay premiums for certified or verified legal wood products, a situation which places significant limitson the ability of suppliers to charge more."

Only some fairly specialized markets have price premiums for certified products. In Europe, FSC-certified tropical wood from Africa and Brazil carries the highest premiums, 20% to 50% above the prices for non-certified products, the report says.

One growth area is chain-of-custody certifications, up 41% in the past year. Numerous printers and paper companies tout their chain-of-custody certifications as evidence of their green-ness without mentioning whether they actually use any certified fiber or paper.

The U.N. study does not address the correlation between certification and sustainable forestry. (See "Does FSC certification help the earth?" for more on this question.) There appear to be many sustainably managed forests that are not certified and some certified forests that are not sustainably managed.

The major forest-certification schemes need to overcome the perception that they are only for large land owners that can afford the administrative costs (or, in some countries, the bribery costs) of obtaining certification.

The U.S. Postal Service took a small step toward intelligent downsizing yesterday with a buy-out package for up to 30,000 employees, but it needs to do two more things -- quickly:

1) Reveal as much as possible about the planned consolidation of its 400 or so processing and distribution centers.

2) Overhaul the process of communicating projected retirement benefits for those who take early retirement.

The deal worked out with two employee unions offers a $15,000 early-retirement package to selected employees, mostly retail clerks, mail handlers, and vehicle technicians. For details, see the USPS announcement, the American Postal Workers Union memo, and the Washington Post's coverage. Also, see the 600-plus comments on yesterday's articles at such sites as PostalNews.com, PostalReporter.com, and PostalMag.com, where some folks are saying they will take the package while others say it's not enough.

Employees have only 30 days to decide whether to take the package, which presents a dilemma for eligible employees at the "P&DCs".

USPS has made no secret of its intent to consolidate its processing network. In just the past 30 days, it has announced eight such consolidations and the potential for five more, according to the APWU. Plans for the Flats Sequencing System suggest many more consolidations of flats sortation if not of entire plants (as discussed in Death of the SCF, Part 3: Flats Sequencing and, more recently, Declining Volumes Lead to FSS Expansion.)

When P&DCs are consolidated, affected employees typically have to commute or relocate to a P&DC in another city. What a shame, and lost opportunity, if some employees decide in September not to take the early-retirement offer and then discover a month or two later that the only way they can avoid being laid off is to take a job more than 100 miles from home.

As for the second thing USPS needs to do quickly, "The Postal Service's Early-Retirement Snafu" has already spelled out how USPS often understates the benefits for prospective early retirees, leading to abysmally low responses to early-retirement offers. If it's worth $15,000 to get people to retire early, it's certainly worth spending a few bucks on employee communication to ensure those people have accurate information about their retirement benefits.

Saturday, August 22, 2009

To cope with declining volumes of catalogs and periodicals, the U.S. Postal Service is adding nearly 300 ZIP codes to the list of areas that will be served by the Flats Sequencing System.

The 100 machines in Phase I of the FSS program will be spread among 42 locations -- including new sites in Houston, Philadelphia, Charlotte, and the Twin Cities -- rather than the 32 in the original plan, USPS revealed Friday. The new plan will shift some flats-sorting work from postal facilities in Minneapolis; Queens, NY; Buffalo, NY; and Southeastern, PA (Philadelphia suburbs).

All 100 machines were originally scheduled to be deployed by late next year, but the program is running a few months behind that plan. USPS is in the process of revising the schedule.

The original Phase I plan, developed during a time of growth for catalogs, magazines, and other "flat mail", included about 1300 ZIP codes. But flat volume was down 11% last fiscal year and has declined 12% so far this year.

Concerned that there would be insufficient volume for some of the huge machines, postal officials now have 2,288 ZIP codes in the plan and are redeploying some machines from the original Phase I sites to the new locations. USPS has not revealed what proportion of flats mail will be served by the Phase I machines, but it appears to be close to 25%. (Update:Multichannel Merchanthas an estimate of 25% to 30%.)

The changes announced Friday include shifting 19 of the Phase I machines to new locations, removing AlisoViejo, CA from the list, and changing where the four Atlanta machines will go. Added to the list of facilities getting FSS machines are two each in the Philadelphia and Atlanta areas as well as ones in Charlotte; Linthicum, MD (Baltimore suburbs); Rochester, NY; Stamford, CT; Westchester, NY; San Francisco; North Houston, TX; and St. Paul, MN.

FSS is supposed to revolutionize the labor-intensive process of sorting and delivering flat mail, cutting millions of work hours (and hundreds of millions of dollars) for USPS and supposedly bringing the Periodicals class closer to break-even. As more machines are rolled out (five are in operation), mailers will eventually be faced with FSS-specific packaging regulations and rate structures.

Monday, August 17, 2009

Unless inflation suddenly rears its head in the next few months, any increases in U.S. postal rates next year would have to be by emergency request rather than being based on inflation.

Inflation would have to rise at an annualized rate of 5% during the final five months of the year for the Postal Service to have even the tiniest of price caps for rate increases in May. The inflation rate would have to spike to 15% for the rest of this year for the price cap to rise by just 1%.

The Department of Labor announced Friday that the Consumer Price Index decreased 0.2% (1.9% on an annualized basis) in July. The Postal Service’s authority to implement normal annual rate increases for most mail – including First Class, Standard, and Periodicals – next May is limited to average changes in the monthly CPI this year versus the same month in 2008. The July CPI was down more than 2% from July 2008, when energy prices peaked.

These, of course, are not normal times for the Postal Service, which is losing billions of dollars and is even talking about running out of money this year. That’s why, as Dead Tree Edition revealed last month, postal officials are considering relatively small “exigency-based” (emergency) rate increases next year in place of the usual inflation-based increases.

Two weeks after that article was published, Postmaster General Jack Potter acknowledged at a news conference that "a modest adjustment in prices" was possible in the spring.

Thursday, August 13, 2009

Pulp and paper mills in the United States earned more than $3 billion in controversial "black liquor" credits during the first half of this year, a Dead Tree Edition analysis shows.

The companies are on pace to earn even more in "alternative fuels tax credits" during the second half of the year if the federal program is not terminated prematurely. The program expires at the end of the year, but the Obama Administration and some members of Congress want to end it early. A few Congress members have advocated some sort of extension.

Twenty-one companies that operate kraft-pulp mills reported to the U.S. Securities and Exchange Commission that they earned or received$2.86 billion from the federal "alternative fuels tax credit" in the first and second quarters.

That doesn't include at least 11 other privately held pulp makers that do not file reports with the SEC. One of those private companies, Georgia-Pacific, manufactures enough pulp to earn well over $200 million per quarter in black liquor credits, according to Equity Research Associates.

The alternative-energy program was originally intended to subsidize the use of bio-fuels to replace petroleum fuels. But International Paper set off a feeding frenzy among pulp makers early this year when it revealed that, by mixing some diesel fuel with the black liquor used to power its kraft mills, it had qualified for the program. Black liquor is a byproduct of the kraft process that pulp mills around the world have been using as an energy source for decades.

IP, the largest kraft producer in the U.S., has already earned just over $1 billion from the program, it reported to the SEC.

Most other publicly traded pulp makers were late to the liquor party. Many started blending diesel with black liquor in mid- to late January, but Weyerhaeuser and SAPPI apparently didn't start until the 2nd Quarter. Now that all of the eligible public companies have qualified for the program, they seem to be on pace to earn at least $1.6 billion in both the 3rd and 4th quarters.

Accounting for the credits varies among the public companies. Some recognized only the payments they had received from the Internal Revenue Service, while most seem also to have booked credits that were earned but not yet in hand. Some reported the amount of credits they had earned, while others first backed out related expenses.

Here are the credits earned from January to June, as best as I can interpret from the SEC reports:

Wednesday, August 12, 2009

Better communication, not additional incentives, is all the Postal Service needs to entice more employees to retire early, a union leader says.

The USPS is providing incomplete benefit estimates to eligible employees, according to Don Cheney, a long-time leader of the Auburn, Washington APWU local who has worked extensively on early-retirement issues for the past six years. In some cases, USPS is providing eligible employees with early-retirement estimates that are at least $1,000 per month too low, says Cheney, who has written several articles about USPS retirement programs for PostalReporter.com

USPS is also failing to counter the common misconception that most eligible employees would be penalized if they take early retirement, according to Cheney.

Noting the importance of early retirements to USPS’s downsizing efforts, Dead Tree Edition reported last week that only 3% of eligible employees have accepted the latest offer because they want to avoid a penalty. But the penalty applies only to employees in the pre-1983 retirement plan known as CSRS, which is less than 20% of the workforce, rather than to the newer FERS plan, Cheney says.

“The U.S. Postal Service failed to promote the unique advantages of VERA [voluntary early retirement] to FERS employees,” Cheney says. “FERS was designed to be a flexible and portable retirement system.”

For example, USPS is not telling FERS employees about the annuity supplement they can receive from age 56 to 62, he says. That normally requires 30 years of service, but the early-retirement program reduces that to 20 years. And because the Postal Service has skimped on retirement counseling, most employees don’t realize that money in their Thrift Savings Plan accounts can be “withdrawn as an annuity at any age without an early withdrawal penalty.”

Postal workers who try to get more information about VERA benefits face a Catch-22 situation -- a USPS notice that for VERA it “cannot verify whether employees are on the eligibility listing or discuss individual questions/concerns until application for early retirement is submitted and approved.”

“Once an application is approved, it is past the deadline to withdraw!” Cheney told Dead Tree Edition. “Who is going to risk applying for VERA under these circumstances without knowing in advance what their FERS annuity supplement is going to be, what deposit must be made for military service after 1956, their eligibility to keep their insurance benefits, etc?”

When an early-retirement package was offered to APWU members six years ago, postal workers came to Cheney for help because he was president of the Auburn local. He remembers one woman in particular.

“People in personnel could not answer her questions. So I read everything I could about FERS. Like FERS-eligibles today, she could not get from USPS an estimate of her FERS annuity supplement, although she was . . . eligible for it. Six years later, FERS-eligibles still get the run-around when they ask about their FERS annuity supplement.”

It's not every day that a union leader says, basically, "You don't need to give us more money, just tell us what we're due."

The atrociously low response to early-retirement offers is evidence enough that the Postal Service needs to rethink its efforts. If even half of what Cheney says is true, the Postal Service is missing out on a seemingly easy, humane, and cost-effective way to carry out a much-needed thinning of its ranks.

Monday, August 10, 2009

Boise Inc.’s effort to claw its way back into the newsprint market with record low prices got off to a slow start but may finally be gaining traction.

The company’s 2nd Quarter newsprint sales declined 53% from the previous quarter and 73% from a year ago, the company revealed last week in an SEC filing. Its average net selling price dropped a whopping $154 per ton, to $434, in a single quarter.

The 3rd Quarter is looking much busier, with the larger of its two newsprint machines running mostly full and likely to stay that way through September, company officials told analysts last week. But pricing has not improved, they said.

Low newsprint prices have provided much-needed cost relief for newspaper publishers. But they are making the prospects even dimmer for some paper makers with higher-cost machines and more dependence on newsprint than Boise has.

Boise blamed the termination of a marketing agreement with AbitibiBowater, along with weak market conditions, on the poor 2nd Quarter performance.

Until late February, AbitibiBowater handled all of the newsprint sales for Boise, which mostly makes uncoated freesheet and linerboard. Boise’s anemic 2nd Quarter newsprint sales, amounting to only 28% of its capacity, suggest it lost most of its newsprint customers when it ended the marketing agreement.

Boise fought back in May with a stunning public announcement that it would sell newsprint for $430/ton, about $150 below market prices, in the five states surrounding its DeRidder, Louisiana mill. Price cuts spread like wildfire across the country as competitors scrambled to hold onto their customers, causing newsprint prices to drop more than $100 in just two months.

Boise could afford such low newsprint prices – below the cash costs of many newsprint mills – partly because its newsprint contains kraft pulp, which is subsidized by the federal government’s “black liquor” tax credits. The irony is that these supposed eco-credits are subsidizing Boise's virgin-pulp newsprint at the expense of mills that rely partly or completely on recycled fiber.

Saturday, August 8, 2009

A journalist friend notes that an article headlined "Dog Bites Man" isn't much of a story, but that "Man Bites Dog" is big news.

Here's a true man-bites-dog story: A paper company is accusing Greenpeace of selling out by setting its standards for eco-friendly paper too low and for backing off on its efforts to protect Canada's boreal forest. This is the same Greenpeace that has used various tactics to embarrass such companies as Victoria's Secret, Sears, and AbitibiBowater over logging in the boreal.

Marcal Paper's criticism of Greenpeace comes barely a week after members of the environmental group were arrested while blocking the entrance to Quebec's Natural Resources Department to protest boreal logging.

The New Jersey-based maker of 100%-recycled toilet paper was commenting on Greenpeace's announcement Thursday that it was ending its "Kleercut" campaign against Kimberly-Clark. Greenpeace agreed to a truce because the maker of Kleenex promised that, by the end of 2011, at least 40% of its tissue fiber will be either recycled or FSC certified.

"Since when is 40 percent a passing grade?" Tim Spring, Marcal CEO, said in a statement issued yesterday. "While I understand the negotiating process, Greenpeace needs to rethink these standards. There is no excuse to make paper from anything but 100 percent recycled fiber, especially when you consider that paper takes up a quarter of our landfill space today."

"It is unnecessary to kill even a single additional tree to manufacture toilet paper, facial tissue, napkins or paper towels," Marcal's statement says.

So what happens next? Here's a hint from Greenpeace's Web site: "Did you know that K-C competitors Georgia Pacific and Procter & Gamble currently have policies that fail to protect the world’s forests?"

Thursday, August 6, 2009

Amidst all the facts and figures flying around Capitol Hill this week describing the Postal Service's dire straits, one important -- and troubling -- statistic has been largely ignored: Three percent.

It's a number that demonstrates what could be the fly in the ointment for the Postal Service's aggressive cost-saving efforts, such as five-day delivery, route consolidation, and facility closings.

"About 150,000 USPS employees were recently offered voluntary early retirement, but fewer than 3 percent accepted," Phillip Herr of the Government Accountability Office told a Senate hearing today. In the private sector, a large company trying to carry out the kind of massive, multi-year downsizing that USPS envisions would consider even a 30% response disappointing.

But USPS's Voluntary Early Retirement (VER or VERA) program is a bust because "it contains a penalty for taking the package," says Eddie Mayhew, a postal consultant and retired Postal Service employee. "The Federal Office of Personnel Management will not grant permission for this program unless there is a two percent a year penalty for leaving with less than the required years of service or age combination."

"Since this penalty can end up in excess of a ten percent reduction in an employee’s pension and the economy continues to make alternate employment nearly impossible, no one wants to partake of the program," Mayhew wrote recently in his private newsletter to customers, who include some big-name magazine publishers. (Mayhew can be reached at emclass@optonline.net.)

With compensation amounting to 80% of USPS costs, any significant cost-cutting program is likely to mean fewer employees. Political opposition and labor-union contracts are likely to stymie such efforts unless most of the downsizing can be accomplished by attrition rather than layoffs.

It seems that some of the billions that the Postal Service is forced to pay into an over-funded retiree-health fund would be better spent on creating meaningful early-retirement incentives.

Tuesday, August 4, 2009

With the U.S. Postal Service struggling to make ends meet, could it cut its losses by getting rid of the money-losing Periodicals Class or at least by jacking up Periodicals rates?

No. USPS is better off with Periodicals than without. And a radical increase in Periodicals rates to make publishers pay their “fair share” of postal costs would probably deepen the Postal Service's financial losses.

USPS recently provided some insights into its cost structure that help explain how the Periodicals class is both officially unprofitable and a contributor to the Postal Service’s bottom line. In explaining its “Summer Sale” on Standard mail, USPS noted that the cost of additional mail during the summer is tiny because low mail volume leads to idle equipment and under-worked employees.

“The general implication of excess capacity . . . is that temporary additions to volume can be worked through the network without generating very much or any additional attributable cost. Rather, unused or underused capacity can be employed to handle any temporary increases in volume,” USPS told the Postal Regulatory Commission.

Although the Postal Service was referring to the slow summer months, declining mail volume has left USPS in a “permanent summer” – with significant and increasing overcapacity regardless of the season.

Consider this factoid from the Postal Service analysis: The “temporary short-run attributable cost” (Postalspeak for variable cost) of a Standard carrier-route piece this summer averages 7.9 cents, but the revenue averages 24.1 cents. The vast majority of Standard carrier-route pieces are “flats” (such as catalogs, as opposed to letters) dropshipped to an SCF; such a piece would have to weigh about a quarter of a pound to cost the mailer 24.1 cents.

For a similar Periodicals piece (a flat weighing ¼ of a pound and entered at an SCF), a Periodicals mailer typically pays about 20 cents. If we can assume that the Postal Service’s costs for handling a magazine are the same as for a catalog with similar characteristics, the Postal Service’s contribution – revenue minus variable cost – would be 12.1 cents (a hefty 60% contribution margin) on the Periodicals piece.

So what’s with all the talk about the Postal Service losing several hundred million dollars a year on Periodicals?

The Postal Service is like an airline that is unprofitable because it is flying a lot of half-full planes. The average cost of a passenger includes many expenses that remain fixed regardless of the number of passengers. You can’t fly with fewer pilots or reduce the jet’s depreciation just because you have fewer customers on board.

Are the low-fare passengers paying less than the average cost of a passenger? Yes.

Would the airline be better off without them? No way. Having one less passenger only saves the airline a bag of pretzels, half a can of soda, and a maybe a couple of gallons of jet fuel -- far less than the revenue it gets from even the cheapest fare.

When people say that Periodicals revenue doesn’t cover the class’s costs, they are referring to average costs, which include a lot of allocations for vehicles, equipment, and labor that would not disappear if Periodicals mail went away. In Accountingspeak, the low-fare passengers and Periodicals pieces are said to have a positive contribution (to the bottom line) or to be profitable at the margin even though some accounting methods would label them as unprofitable.

(There is strong evidence that the Postal Service’s cost-allocation system is unintentionally biased against the Periodicals class, as explained in For Periodicals, The Postal Service’s Math Doesn’t Add Up. The Periodicals rate structure is also biased against dropshipped, finely sorted mail and encourages publishers to mail in less-than-efficient ways.)

The money-losing airline knows that its path to profitability is either getting more BIS (Butts in Seats) or decreasing the cost of flying – not getting rid of low-fare passengers. If prospects for attracting new customers are limited, the airline will either run fewer flights or switch to smaller airplanes.

With its current structure, the Postal Service’s main problem is not that it doesn’t charge enough for mail pieces but that it doesn’t have enough mail pieces to charge for. With limited prospects for growth, USPS must reduce its cost structure, not jettison customers, to get its financial house in order.

Congress members and other government officials give lip service to the Postal Service’s need to economize but then block it every step of the way and prevent it from offering a meaningful early-retirement program. The cost of such denial is dysfunctionality. Rather than being able to thin its ranks rationally and humanely, USPS sometimes ends up transferring employees hundreds of miles from their homes, without relocation assistance, when their current positions are eliminated.

Some have suggested that Periodicals rates need to be increased by 17% or more to get the class to break-even status. But such a “rate shock” would only spur publishers to shift more of their business to digital and other non-mail alternatives, as happened a couple of years ago with lightweight catalogs.

Fortunately, by introducing programs like the Summer Sale and declaring that "exigent" rate increases are a last resort, postal officials seem to understand that they must attract new mail volume and not price USPS out of the market.

Saturday, August 1, 2009

The rapid decrease in prices for coated paper the past few months caught nearly everyone by surprise. Now the question is whether the drop is over.

Just four months ago, Dead Tree Edition conducted a poll asking readers to predict where the RISI index for 40# coated #5 would be in July. Only 29% said it would be less than $820 per ton ($41/cwt.) RISI itself was predicting that the index, then at $900, would bottom out at $845 in the 3rd Quarter.

RISI revealed its July numbers yesterday, showing that it and most of our readers were way off the mark The index was at $770.

The market had become accustomed to coated mills, especially market leader NewPage, closing machines or even entire mills to bolster pricing amid falling demand. But by spring, most of the obvious North American candidates for mothballing were gone. That left large, efficient machines able to produce more coated paper than North America needs.

The mills battled back with down time, making uncoated products on coated machines, and winning business from offshore mills. But it still wasn't enough, as many customers caught short by the rapid decrease in their own consumption simply stopped buying for awhile and used their inventories instead.

Some people argue that prices will start rising because the mills are hurting so bad. By that logic, magazines will see their ad pages start bouncing back and the Postal Service can stop worrying about the loss of First Class Mail. Wishes don't always come true. In fact, mills that are struggling to stay afloat are more tempted to drop their prices rather than idle their machines -- unless the prices no longer cover their cash costs.

With the Canadian dollar, energy costs, and pricing for market pulp all rising, paper prices may be nearing cash costs for some mills. In fact, Kruger recently announced the permanent shutdown of the small coated machines at Trois-Rivieres, Quebec. But most North American coated paper is made at U.S. mills by companies like NewPage, Verso, SAPPI, and AbitibiBowater that have their own kraft mills that for now are heavily subsidized by the federal government.

StoraEnso, which owns one-fifth of NewPage, isn't counting on a rebound any time soon. It recently wrote down that investment, citing "poor prospects of an upturn in the [North American] market."

Perhaps the paper market is like the U.S. economy, where GDP sank by "only" 1.5% in the 2nd Quarter versus 6.4% in the 1st Quarter: The paper market may not be improving, but it's probably getting "less bad" than it was in the spring.

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